Some Borrowers Find Loopholes To Escape Student Loan Debt

A recent article in the Wall Street Journal discussed a tactic used by some debtors to escape what many once thought was inescapable: student loan debt. Bankruptcy rules were written in a seemingly ironclad way that prevents the vast majority of debtors from getting out from under potentially massive mountains of student loan debt. Though many have tried over the years, very few have succeeded.

Until recently, the only successful approach to discharging student loan debt is to meet the incredibly high burden of proving that a borrower has extreme financial hardship. This test is purposely difficult and requires those attempting to discharge student loan debt to show there is no possible way they could ever make such payments without causing extreme hardship for themselves and their families.

Thanks to some creativity by a few bankruptcy attorneys around the country, there may be a new approach to discharging some student loan debt. This new approach depends on a strict interpretation of the definition of what is a student loan. The bankruptcy code says that borrowers are not able to discharge loans made for an educational benefit. This somewhat squishy language provides just enough of an opening for debtors and lawyers to run, claiming that various types of loans fall outside this category.

One such example of loans that fall outside of those providing an educational benefit are those for studying for a bar exam. It’s common that students in their third year of law school take out bar prep loans, money meant to pay for the expensive bar studying courses and provide money to live over the course of the summer when you’re expected to study rather than work. One woman in New York argued that her $15,000 bar loan didn’t qualify as a loan for educational benefit and should be dischargeable. To the surprise of many, she won. The bankruptcy court agreed that her Citibank bar study loan should be treated like other consumer debt and thus be dischargeable.

Another successful avenue of attack has been on loans for schools or programs that are unaccredited. In a recent case, a judge ruled that loans taken out to attend an unaccredited medical school in Africa should be discharged. Though the loans were taken out for educational benefit, the lack of accreditation meant that the student was ineligible to sit for medical-board exams in many states, meaning there was no actual educational benefit to the loans.

Though this is an approach worth considering for those with similarly situated loans, it’s important to understand that this is a relatively small loophole, not a solution to the broader student loan debt crisis. Experts estimate that these kinds of loans that fail to qualify as an educational benefit make up only around 10% of the $1.3 trillion student loan market. This means that those with certain kinds of student loan debt will be able to employ such strategies in an attempt to escape the debt. That said, if you happen to fall within this group it’s certainly worth looking into. Lawsuits aimed at canceling some student loan debts are popping up across the country as lawyers realize there may be more room to maneuver than was previously thought possible.

If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.